This week, more than three million Internet users who get their high-speed cable modem connections from Excite@Home watched their ISP struggle to survive. On the surface, it was a simple matter of a $50 million loan being called due, but underneath, the real issue was the very viability of broadband Internet access. With DSL companies failing one after another, and now the number one cable Internet provider apparently about to go under, is broadband, itself, in trouble?

Yes.

That's not the way the industry analysts see it. According to published quotes from the Gartner Group and Forrester Research, the problem with Excite@Home was one of corporate schizophrenia as the Excite portal failed to keep its advertising revenue growth in line with @Home's rapidly building subscriber base. Excite was a drag on the operation, pulling down its higher-flying corporate twin. But in this case, the analysts are wrong. And understanding why they are wrong can teach us all a lot about where the Internet is and isn't going.

Excite was one of the first search engines and an early Internet portal, competing primarily with Yahoo. @Home was a high-speed Internet service provider owned by cable television systems. In January 1999, @Home bought Excite for $6.7 billion in stock. To understand how the companies got to today's dismal reality, it would be a good idea to start with a look at the two operations at the time of their merger. Excite was profitable, had no debt, and lots of cash from its successful IPO. Excite revenue came from advertising and nearly all its users were on analog modems. @Home was not profitable, but like Excite had no debt, and lots of cash from its successful IPO. Nearly all @Home users were on high-speed cable modems.

The merger was fraught with problems from the very beginning. The first big problem was the fact that @Home's board did not appear to understand the ramifications of their purchase of Excite until after it was done. The whole point of the merger was to create a broadband online service offering everything from connectivity to content — a kind of high-speed AOL that would crush AOL. But after approving the merger, AT&T (@Home's largest shareholder) changed their mind on that vision. For awhile, it wasn't clear why the two companies had even merged.

Then the "open-access" pressure set in, with ISPs demanding access to users on @Home cable systems. Against this backdrop, uncertainty and infighting at the board level made it impossible for the company to execute against the synergies that made the merger worthwhile in the first place. With the board resisting the vision of the company, Excite and @Home were effectively just two unrelated businesses stuck on the same balance sheet.

The other big problem was @Home's mishandling of Excite. When the merger was completed, Excite was cash flow positive, bringing in a lot of revenue, and very successful in the portal space, though still far behind Yahoo. In fact, for the first year or so after the merger, Excite's revenue kept afloat the cable side of the business — the @Home part.

With Excite paying the bills, the combined company still might have been successful — except the newly merged company chose to deploy tremendous Excite resources on building a broadband-specific version of the portal when the revenue justification was tenuous (there just weren't enough broadband users) and the board support was non-existent. This resulted in a lack of focus and a long decline of the portal in general. Spending money to build the broadband portal hurt the narrowband portal that was paying the bills. The end result was that the company had a much harder time retaining portal advertisers than their competitors. All the portals were struggling with the downturn, but only Excite was neglecting its paying customers and burning resources to build a broadband presence that hardly anyone even saw. The result was that Excite declined faster and further than did the other portals.

Without advertisers, the portal business became a big cash drain on the overall company. Of course, the long-term vision for the merger required a broadband portal, but there simply weren't enough broadband customers to justify the resources expended on the project.

But wait, it gets worse. AT&T, @Home's largest shareholder, appears to many to have acted in a way that virtually guaranteed the failure of its subsidiary. Just when things were getting bleak, AT&T sent in a team of network engineers to improve reliability, and those engineers spent literally tens of millions of @Home dollars upgrading the network, contributing to the present cash crunch. Ultimately, @Home was in such poor financial shape that it had to sell back to AT&T the very same network it had just spent money upgrading. Big corporations can be smart sometimes. And if Excite@Home files for bankruptcy, as seems inevitable, its biggest creditor is AT&T, which will effectively get the rest of the company for free.

But what part of AT&T are we even talking about? Why AT&T Broadband, the part of AT&T that is, itself, up for sale! So having assisted in the death of its subsidiary, Ma Bell probably won't even get to share in any inheritance.

Wow, that's a lot of corporate intrigue! I only know about it because I have kept a close eye on the company since meeting the Excite founders in their garage back in 1993. And no, I have no financial interest in any of the companies mentioned in this column.

There is, however, this underlying issue that the analysts, especially, seem to have missed. Excite@Home failed mainly because broadband did not grow as quickly as expected. Broadband is not, at this time, a viable industry. Let me repeat that: Broadband is not, at this time, a viable industry. So Excite@Home was doomed to fail. There was probably nothing they could have done to stop the failure. Not only were there not enough broadband portal customers, but giving 65 percent of the ISP revenue to participating cable companies meant that the high-speed ISP part of the company would have never shown a profit no matter how big it grew.

A few days ago, I was talking with a vice president at Lucent Technologies, another company that is bleeding from every possible corporate location. "There are approximately 400 million people on Earth who now have Internet access, but fewer than 10 million of those have broadband," he said. "That is less than a three percent market penetration and it means that IF broadband is going to be a commercial success — and that's a very iffy IF — it will be years in the future."

So Excite@Home was doomed from the start. The only way to have avoided the current problem would have been to never merge in the first place, but $6.7 billion, even if it is all just stock, is hard to walk away from.